In depth: Why China’s ratings agencies didn’t see default wave

In depth: Why China’s ratings agencies didn’t see default wave

Regulator meddling and SOE bonds in packaged investments create headaches

In the wake of the market-rocking bond default by state-owned miner Yongcheng Coal in November, one particularly unsettling fact stood out.

Just one month before the cash-strapped state-owned enterprise (SOE) revealed it couldn’t repay the 1.03 billion yuan ($159.5 million) in principal and interest due on Nov. 10, it had received the highest AAA rating from China Chengxin International Credit Rating — one of the country’s top ratings agencies.

That fact raised an obvious question: Just how did a ratings company that sells itself as an impartial evaluator of corporate financial health manage to get it so wrong?

As more companies defaulted in the weeks that followed, China Chengxin and other ratings agencies came under fire for failing to give companies the ratings they deserved. On Dec. 29, a self-regulatory body banned China Chengxin from rating any new interbank bonds for three months over misconduct related to the Yongcheng Coal default.